It’s all about the tenant. Tenant retention and the ability to attract a suitable tenant is the fundamental issue at the heart of property investment. For us at Eagle Property Group this is absolutely paramount. Before we decide to buy an asset, and even at regular intervals during our ownership, we ask ourselves the question “Is this an asset we are happy to own empty?”
We don’t of course want a tenant to vacate but it is a simple fact that eventually every tenant leaves and at that point the attributes of the asset and how it compares to other properties becomes vitally important.
This is why location is such an essential factor to consider when buying a property. The better the location of the asset, the more likely it is to attract a tenant.
Every investment opportunity presents its own unique set of circumstances and we tailor our investment strategy accordingly. It is not practical to provide detail on our investment strategy for each and every asset but there are some factors common to each deal that need careful consideration and we shall address those.
If more than one investor owns an asset, it is prudent to have a strategy that allows one of those investors to exit without undue difficulty. Unit Trusts typically have a specific fund term at the end of which the asset is usually sold, unless the majority of investors determine otherwise. For us, this period is usually between 5 – 7 years but where we differ from most other funds is that we (usually) require a 75% majority. The reason for this is that a 75% majority is more likely to be able to buy out the remaining investors than a 50% majority. The 75% majority rule applies to most decisions the investor makes during the fund term.
In spite of this, an investment in a closed-ended property unit trust should be considered to be illiquid.
It is fair to say we are more conservative in the use of debt than our peers. Debt of course has an amplifying affect on returns and while this is beneficial during strong market conditions it can be a great burden in weak ones. It is uncommon for our level of debt to exceed 50% of the purchase price of the asset and it is often far lower however we will consider higher borrowing levels if the quality of the covenant and term of the lease provide a sufficient cushion to withstand a market cycle.
Cash on Hand
Cash holdings directly and negatively affect the performance of a fund and therefore the potential fees payable to a manager. As a consequence, it is uncommon for property managers to hold more than the bare minimum and in our view this is a serious error of judgement. Not only are buildings depreciating assets and therefore by definition require ongoing repair and improvement but tenant enticements often need to be made and banks occasionally need to be provided with a degree of comfort. Besides, there is little more disheartening to an investor than being asked to cough up more cash when their initial investment is not faring well. Like most businesses a sensible and even conservative cash provision is essential when acquiring properties in a unit trust structure.